Besides its well known tourism sector, Sri Lanka has relied on exporting low-value goods, such as cinnamon, tea and apparel. Now, through its young and well-educated population, the country is looking to take its economy up a gear. Kimberley Long reports. 

Sri Lanka

Just as Sri Lanka’s economy looked like it was back on its feet, things took a turn for the worse. Like many countries that are dependent on the tourism industry for a large percentage of their gross domestic product (GDP), Sri Lanka has been hit hard by the coronavirus outbreak. But this has come as a double blow to the country that was still working to get back to normal following the devastating terrorist attacks of Easter Sunday 2019. 

It is hoped that tourism will rebound again quickly once travellers can return. Mark Prothero, CEO of Sri Lanka and the Maldives at HSBC, says: “Tourism was badly hit by the Easter Sunday 2019 attacks, but – as with similar experiences in places such as Bali and Tunisia – Sri Lanka will recover and once again become a top destination for tourism, given the variety of attractions on offer.” 

Not just tourism

Other areas of the economy may take much longer to bounce back. Sri Lanka’s sizeable apparel sector has been badly affected by the coronavirus. Exports have plummeted as orders have dried up, and a drop in the export of raw materials from China has also slowed down manufacturing. 

Industry group Joint Apparel Association Forum (JAAF) reports that the sector employs 400,000 people and saw $5.6bn in exports during 2019, a 5% increase on the previous year. However, the group expects Sri Lanka to see a $1.5bn contraction in exports in the three months to the end of June 2020, compared with the same period of 2019. “The damage does not stop there as we expect further demand contractions that could result in reduction of apparel exports by an additional 30% to 40% after June, in a best-case scenario,” JAAF chairman A Sukumaran said in a statement. 

Finding new ways to bolster the country’s economy through this most difficult time has, therefore, become increasingly important. 

Digital economy 

Sri Lanka was already exploring how it could diversify its economy and move up the value chain before the double hit of the terrorist attacks and coronavirus. 

One such option is the country’s burgeoning technology sector. Rajendra Theagarajah, managing director and CEO of Cargills Bank, says: “There has been considerable investment in the technology sector, aided by the development of a regulatory sandbox. Technology is a high-value addition in the economy. International banks that are outsourcing some of their functions to Sri Lanka are helping to create another high-level sector.” 

Historically, banks had been drawn by the comparatively low cost of running operations out of Sri Lanka. However, this does not mean that the only services being provided revolve around low-value processing. HSBC’s Mr Prothero says: “Business process outsourcing [BPO] is one potential growth area, thanks to the quality of graduates, proficiency in English and the IT talent in Sri Lanka.”  

HSBC has outsourced a number of its operations to Sri Lanka. While they include call centre operations, they are also running more complex operations, taking advantage of the high number of people with UK Association of Chartered Certified Accountants qualifications. 

Sri Lanka is also the home of the technology used by the London Stock Exchange (LSE). MillenniumIT was bought out by LSE in 2009, but its main operations still take place at a complex outside Colombo, Sri Lanka's largest city. The systems have since been adopted by a number of international exchanges, including Borsa Italiana and the Johannesburg Stock Exchange. 

Overall, these operations are making a significant contribution to Sri Lanka’s GDP. According to the central bank’s 2018 annual report, IT and BPO sectors were worth a combined $848m that year. 

Modernising infrastructure 

Infrastructure projects may also prove to be a significant driver of growth in Sri Lanka. The country emerged from 25 years of civil war in 2009, and has still to catch up on many of the infrastructure projects that had been long neglected. Currently there are just 354 kilometres of expressway, with many smaller towns requiring long journeys to access metropolitan areas. 

Railways are also in need of upgrading, with plans in place to convert the current diesel network to electric. The Asian Development Bank agreed in August 2019 to provide a $160m loan to Sri Lanka Railways to improve operations and efficiency on the network. In addition to the economic boost this should bring, there is the added benefit of improved domestic transportation optimising shipping times and costs. 

The most notable project is the hugely ambitious Port City in Colombo. Built on 270 hectares of reclaimed land, it will almost double the size of Colombo by its scheduled completion in 2041. Port City is being constructed by China Harbour Engineering Company, part of China Communications Construction Company. In addition to a financial district, which is hoped to attract international companies, there are plans for a sizeable residential area that includes facilities such as schools, a hospital and potentially a theme park. 

There is optimism regarding how the project fits within the country’s wider economic plans. Amana Bank CEO Mohamed Azmeer says: “There is the potential for Colombo to create an economic hub in Asia. The Port City has already seen $8bn in investment. There is large potential growth in other sectors. Manufacturing, coal and rubber have fallen in recent years and there have been moves to revive these industries. The technology sector also has huge potential.” 

However, others have reservations about what the project will bring, especially as there have been discussions of it operating as a free-trade zone. Cargills Bank’s Mr Theagarajah says: “Port City is a massive project, but there is no decision on its legislation yet. This will possibly deter some markets from adding it to their future expansion plans. The aim of the project is to create a region-specific version of Canary Wharf, but it remains to be seen if this is what is wanted in south-east Asia.”

Regional co-operation 

It is hoped that Sri Lanka’s strategic location in the Indian Ocean will play to Port City’s advantage. The country lies in the shipping lanes between south-east Asia and Europe, and is also located in the middle of the Chinese and Middle Eastern time zones. 

Mr Prothero says: “Sri Lanka has strong economic potential, given the strategic location advantage it enjoys, being important to both India and China and located along the main East-West cargo shipping lane. There is a need to maximise intra-Asian relationships, and put trade agreements in place, building on the strong export relationships Sri Lanka already enjoys with the US and Europe.” 

As part of China’s Belt and Road Initiative, Sri Lanka is looking towards Chinese investment. Motivated by this potential, Bank of China established a presence in the country in March 2018, but its plans for growth have been hindered by events beyond its control. 

Wang Chuan, country manager for Sri Lanka at Bank of China, says: “The bank is focused on corporate banking. We have a remit to provide credit for infrastructure projects and to attract more foreign direct investment. The issues seen in Sri Lanka over the past year have affected investor confidence, and we have not seen the level of engagement we had hoped for so far.” 

As companies struggle through difficult times, there may be opportunities for greater international investment, especially by countries that do not already have a large presence in Sri Lanka. Mr Wang adds: “We have been helping companies in Sri Lanka by matchmaking them with potential Chinese investors. The business benefits for Chinese investors in working with Sri Lanka are not too well known in China, so there is a strong potential for growth – and [potential for] an increased number of [Chinese] tourists.” 

Sri Lanka needs to ride out this latest storm and hope that, given time, both the business and the holiday-makers will return. 


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